Tax Department's Action on Small Taxpayers: Section 87A Rebate Rejection Notices – Know Your Rights and Solutions Under the Old and New Tax Regimes!

Recently, taxpayers who filed their Income Tax Returns (ITR) for the financial year 2023-24 (assessment year 2024-25) have been receiving tax demand notices from the Income Tax Department rejecting the tax rebate claimed under Section 87A. This issue particularly affects those taxpayers who included special rate income, such as Short-Term Capital Gains (STCG), in their total income while availing of the rebate.

Section 87A Tax Rebate Provision

Under the old tax regime, taxpayers with a total income of up to ?5 lakh were eligible for a maximum tax rebate of ?12,500, effectively reducing their tax liability to zero. In contrast, under the new tax regime, taxpayers with a total income of up to ?7 lakh were entitled to a rebate of up to ?25,000.

Background of the Dispute

The Income Tax Department has issued tax demand notices to multiple taxpayers, disallowing the rebate claimed under Section 87A. This has particularly impacted those who claimed the rebate on Short-Term Capital Gains (STCG).

According to tax experts, numerous revised ITRs claiming the rebate under Section 87A on STCG were filed by January 15, 2025. As the processing of these ITRs is underway, the department has started issuing intimation orders rejecting the rebate claims and generating tax demands.

Experts in the field have pointed out that ITR processing is still ongoing, and wherever STCG was considered for claiming the Section 87A rebate, tax demands are being raised as this matter remains unresolved. Additionally, the tax department has resumed issuing demand notices rejecting Section 87A claims. Many taxpayers received intimation orders on February 24, 2025, rejecting the rebate, despite the utility allowing it at the time of filing.

Bombay High Court’s Ruling on January 24, 2025

On January 24, 2025, the Bombay High Court issued a critical judgment on this issue, questioning the Income Tax Department's decision to disable the Section 87A rebate claim option in the utility from July 5, 2024.

The court remarked, “The facility to claim the rebate, which was available until July 5, 2024, could not have been abruptly discontinued merely based on the revenue officials' administrative opinions deeming such claims untenable. This is akin to a court registry refusing to accept a filing on the assumption that the suit is without merit. Such denial of access to justice is unacceptable.”

The Bombay High Court directed the Income Tax Department to allow taxpayers to claim the rebate under Section 87A on special rate income, including STCG. However, it left the final decision of granting or denying the rebate to the judicial authorities for further examination.

Case Law Details:

• Case Name: The Chamber of Tax Consultants versus Director General of Income Tax (Systems) (2025)
• Court: Bombay High Court
• Citation-2025 TAXONATION 106 (BOMBAY)
• Date of Judgment: January 24, 2025
• Key Issue: System flaw in ITR utility barring taxpayers from claiming rebate under Section 87A
• Precedents Cited: Lupin Ltd., Tata Sons Pvt. Ltd.

Options Available for Taxpayers

1. Review the Notice Carefully: If you receive a tax demand notice, verify its accuracy and calculation. If discrepancies exist, prepare necessary documentation to clarify them.
2. File a Response: Log in to the Income Tax Department’s portal and submit an appropriate response with supporting evidence within the stipulated time.
3. Seek Professional Help: If the matter is complex, consult a Chartered Accountant (CA) or tax expert to draft a legally sound response.
4. Opt for the Appeals Process: If your explanation is rejected and a tax demand remains, you can appeal to the Income Tax Appellate Tribunal (ITAT) for redressal.

Preventive Measures to Avoid Future Tax Demand Notices

• Stay Updated on Tax Regulations: Ensure you are well-informed about the latest tax rules before filing your ITR.
• Avoid Claiming Rebate on Special Rate Income: If you have income taxed at a special rate, such as STCG, be cautious while claiming rebates.
• Analyze the Old vs. New Tax Regime: Compare the implications of both regimes before opting for the most beneficial one.
• Seek Expert Tax Planning Advice: Consulting a professional can help you plan your taxes efficiently and avoid potential compliance issues.

Conclusion

The rejection of Section 87A rebates has become a significant concern for small taxpayers. If you receive such a notice, do not panic—follow the correct procedure and submit a well-documented response. Additionally, proactive tax planning in line with the latest regulations can help mitigate future tax liabilities and ensure compliance with the law

CA Kavita Dhingra

cakavitadhingra@gmail.com

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